Revisiting February 2018: How Did You React to the Selloff?

May 16, 2018

The S&P 500 Index and Dow Jones Industrial Average plummeted by more than 10% over a period of nine trading days ending in early February.

  • Shaken by the experience, many investors were left wondering what they should’ve done differently beforehand or what they should consider doing in the aftermath.
  • February’s decline was large enough to evoke concern, but small enough to serve as a useful test case for anticipating your reaction to larger selloffs that will eventually come 
    to pass.

On February 8, 2018, U.S. equity markets closed in correction territory—with the S&P 500 Index and Dow Jones Industrial Average having plummeted by more than 10% from their respective all-time highs over a period of just nine hyper-volatile trading days. The NASDAQ Composite Index trailed by just enough to avoid a 10% decline, no doubt supported by its heavy orientation toward technology stocks.

Exhibit 1: Course Correction

course correction

Indexes rebased for comparison: 10/2/2017=100. Sources: S&P Dow Jones Indices LLC, NASDAQ OMX GROUP, Federal Reserve Bank of St. Louis

Many investors were shocked by the speed and magnitude of the decline. Still others were rattled by the return of high volatility following a period of tranquility that stretched back to the contentious November 2016 U.S. presidential election and, before that, the June 2016 Brexit referendum surprise. But come early February this year, the VIX (CBOE Market Volatility) Index spiked to its highest level since August 2015, when stock prices suffered their sharpest one-day drop in four years on lingering concerns about China’s economy and energy-price weakness.

The Aftermath

Shaken by significant losses, many investors were left wondering what they should’ve done differently beforehand or what they should consider doing in the aftermath.

We agree that market dislocations provide occasion for a bit of self-reflection: How did you react to the selloff? Did you panic and sell? Did you question your investment strategy?

The Assessment

Nobody enjoys losing money. So it was to the relief of many investors that the February selloff dissipated almost as quickly as it arrived. Yes, it was a large enough drop to evoke concern, but small enough to avoid triggering widespread hysteria. In fact, like the proverbial “canary in a coal mine,” the recent correction serves as a useful test case for the larger selloffs that will eventually come to pass—and that your future self may benefit from considering today how you may react to such an event.

In doing so, it may be helpful to reflect on whether your current investment mix aligns with your answers to these questions:

  • What are my financial goals?
  • How long is my time horizon for these goals?
  • Do I have a sufficient plan to achieve these goals? Am I still on track?
  • Is my risk-tolerance level reflected in my investment portfolio?
  • Am I making investment decisions based on reaching my goals rather than chasing market performance?

Index Definitions

Chicago Board Options Exchange Volatility Index (VIX): The VIX tracks the expected volatility in the S&P 500 Index over the next 30 days. 
A higher number indicates greater volatility.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and NASDAQ.

NASDAQ Composite Index: The NASDAQ Composite Index is an unmanaged, market-capitalization-weighted index that consists of all securities listed on the NASDAQ exchange. It is often used to gauge the performance of global technology stocks.

S&P 500 Index: The S&P 500 Index is an unmanaged, market-capitalization-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market.

Legal Note

Important Information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

There are risks involved with investing, including loss of principal. Diversification may not protect against market risk.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.

Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

The performance data quoted represents past performance. Past performance does not guarantee future results.